Oct 8, 2018

Budget stereotypes are dying hard in Europe

Italy's Prime Minister Giuseppe Conte (L) and British Prime Minister Theresa May at the G7 Summit. Photo: Leon Neal via Getty Images

Italy's deficit was always greater than that of the U.K. — until 2007, when it shrank to just 1.5% of GDP. Since then, the roles have been reversed: Italy, constrained by its membership in the eurozone, has had relatively modest deficits, while the U.K., with a free-floating currency, has been able to spend more to recover from the crisis.

The big picture: Stereotypes die hard. The U.K. is proclaiming an end to austerity, while Italy has just emerged from yet another budget crisis.

  • In the end, the bond vigilantes won, and the populist government was forced to announce that it will reduce its deficit over the next three years.
  • Next year's deficit of 2.4% of GDP is now an absolute cap, and 2% or lower is the medium-term target.
  • Meanwhile, expect Britain's deficit to explode after Brexit, as the government tries to counteract the effects of being cut off from its own continent.

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